We use BERT, an AI-based algorithm for language understanding, to quantify regulatory climate risk disclosures and analyze their impact on the term structure in the credit default swap (CDS) market. Risk disclosures can either increase or decrease CDS spreads, depending on whether the disclosure reveals new risks or reduces uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads after the Paris Climate Agreement of 2015, while disclosing physical risks decreases the spreads. In addition, we also find that the election of Trump had a negative impact on CDS spreads for firms exposed to transition risk. These impacts are consistent with theoretical predictions and economically and statistically significant. 

We assess how investors' willingness-to-pay (WTP) for sustainable investments responds to the social impact of those investments, using a framed field experiment. While investors have a substantial WTP for sustainable investments, they do not pay significantly more for more impact. This also holds for dedicated impact investors. When investors compare several sustainable investments, their WTP responds to relative but not to absolute levels of impact. Regardless of investments' impact, investors experience positive emotions when choosing sustainable investments. Our findings suggest that the WTP for sustainable investments is primarily driven by an emotional rather than a calculative valuation of impact. 

This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: Kinder, Lydenberg, and Domini (KLD), Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated. 

Investors and regulators require reliable estimates of physical climate risks for decision-making. While assessing these risks is challenging, several commercial data providers and academics have started to develop firm-level physical risk scores. We compare six physical risk scores. We find a substantial divergence between these scores, also among those based on similar methodologies. We show how this divergence could cause problems when testing whether financial markets are pricing physical risks. Hence, financial markets may not adequately account for the physical risk exposure of corporations using available risk scores. Finally, we identify key sources of uncertainty for further investigation. 

This article asks how sustainable investing contributes to societal goals, conducting a literature review on investor impact—that is, the change investors trigger in companies’ environmental and social impact. We distinguish three impact mechanisms: shareholder engagement, capital allocation, and indirect impacts, concluding that the impact of shareholder engagement is well supported in the literature, the impact of capital allocation only partially, and indirect impacts lack empirical support. Our results suggest that investors who seek impact should pursue shareholder engagement throughout their portfolio, allocate capital to sustainable companies whose growth is limited by external financing conditions, and screen out companies based on the absence of specific environmental, social, and governance practices that can be adopted at reasonable costs. For rating agencies, we outline steps to develop investor impact metrics. For policy makers, we highlight that sustainable investing helps diffuse good business practices, but is unlikely to drive a deeper transformation without additional policy measures. 

This guide supports impact-driven investors in developing an investment strategy that accomplishes real-world change. Changing the world through investing is complex and has been studied by many academic researchers. We’ve reviewed existing research,1 examined the mechanisms researchers have identified, and synthesized the available evidence in order to offer these practical recommendations on how to maximize your impact as an investor with an evidence-based investment strategy. 

Since August 2022, European banks have been required to record clients’ sustainability preferences under the MiFID II regulations. We present the results of a survey of banks to understand the practical consequences of this rule. We find that banks implement the regulation in different ways with no clear emergence of a common practice yet. Our main results indicate that, on average, only 5% of clients express a preference for sustainability. This figure is low compared to the fraction of clients who have invested in sustainable products, which is on average 40%. We explore possible reasons for this gap and offer suggestions for improving the measurement of sustainability preferences. 

This document contains concise summaries prepared by students of the course 8,199,1.00: ESG Metrics and Portfolio Management at the University of St. Gallen. It focuses on regulatory rules related to entity-level disclosures and fund-level disclosures that apply in the European Union, the United Kingdom, the United States, and Switzerland. The summaries provide a hands-on guide to which entities the rules apply, what needs to be reported, and when the rules enter into force.